The current tax credit for first time home buyers was set to expire on November 30th, 2009. 
However, the President has signed HR 3548 - a bill that extends that time frame and allows most all purchasers of principal residences to benefit as well.

The Changes:

1. Extend the current first-time homebuyer tax credit of $8,000 through April 30 of 2010. However, if you have a binding contract by that date, you will still qualify if you close within 60 days of deadline.
2. Extend a tax credit of $6,500 to existing homeowners or "move up" buyers in addition to the first-time homebuyers. The home you are leaving must have been used as your principal residence for at least the last 5 years.
3. Increase the income limitations for the maximum benefit to $125,000 for singles and $225,000 for married couples.
4. Purchase limit is $800,000.
5. Military waiver provision cancels recapture provision if the home does not remain your principal residence for at least 36 months.

We are updating our free report "$8000 Tax Credit" and it will be available on our website very soon.  If you have any questions before then, please call us toll free at 1-888-562-6200. 

Today the Federal Reserve closed out a two-day meeting with a unanimous vote to keep benchmark overnight interest rates unchanged in a range of zero to 0.25 percent. 

(It is important to note this is not the mortgage loan rate - it is the overnight rate depository institutions charge to other depository institutions.  So basically, it is what banks charge each other, not what banks charge borrowers.  It directly affects the Prime Lending rate offered by banks on home equity loans, and you can usually add 3.00% to the Fed Funds rate to discover the Prime Lending rate, currently at 3.25%.)

The Fed's statement said the U.S. economy had "continued to pick up" since its last meeting in September, but it expressed concern that the economy's recovery was likely to be muted.  "Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," it said. While still emphasizing risks, the Fed was a bit more upbeat than it was in September, when it had simply said spending was "stabilizing." 

The Fed was more explicit than it had been about why it expects to be able to keep overnight rates "exceptionally low" for a long time, citing "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."

The central bank, wary of undercutting the fragile recovery by withdrawing its monetary support too soon, has also been on guard for any indication that its emergency lending efforts could fuel an unwelcome bout of inflation down the road. 

In another policy statement, the Fed said it would buy only about $175 billion of debt issued by government-backed mortgage finance agencies, down from the up to $200 billion it had planned to purchase, citing limited availability of the paper. The Fed has been buying mortgage-related debt to help keep home mortgage borrowing costs low.

What Does This Mean For Mortgage Interest Rates?

Mortgage rates are affected by various issues that affect the economy in general, but one item that makes interest rates move higher is inflation.  The Fed's statement about inflation being "subdued" and "stable" are good signs for mortgage rates.  However, the Fed's program of purchasing mortgage-backed securities (MBS) to keep interest rates low had done just that - but this is artificial. 

Normally large investors (pension funds, mutual funds, other countries) purchase these securities and the market dictates where the rates go.  The Fed has been purchasing so much of this debt in 2009 that it has kept mortgage rates in the 5.00% range, give or take .25%.  Their statement of decreased purchasing throughout the rest of this year and into the first quarter should concern those that have not locked in a rate.  Once the Fed stops or slows down purchasing of these MBS, the artificial "ceiling" will be lifted and market will dictate the rates again.  Most bond traders estimate once this happens, we could see interest rates for mortgages jump somewhere around a full 1.00%. 

Our advice has been and continues to be this; if you see a good benefit to refinancing at the current rates or you are purchasing and the rates are favorable - lock in that rate while you can.  Timing the market is rarely wise because more people end up missing the low rates trying to time the bottom than those that actually get the lowest rate. 

Today the Federal Reserve announced it will extend purchase of mortgage backed securities until Mar 2010. However, they will be gradually slowing the pace of those purchases in order to promote a smooth transition in the markets.

Then they reiterated they would keep their options open.

The bond market and mortgage rates initial response was very positive, then went on a roller coaster ride. 

The bond finished up + 9bps Wednesday evening, turning around what was a - 34bps loss just prior to the Fed meeting.  That means interest rates finished up a little better today from their 12:00 levels.
I think this activity of uncertainty will be the norm as we go through the remainder of this year. 

And because we know the Fed's program is an "artificial" rate lowering program and the subsidy is going to taper off and go away, I would put some serious thought into locking in a rate if you have a good benefit.

Author: Doug Walker, VP of Sales and Marketing
Phone: 615-370-8888

On September 22-23, the FOMC (Federal Open Market Committee) will meet to discuss the government's MBS purchase program (Mortgage Backed Securities). 

What Does This Mean In English?
At this meeting, it is expected the Fed will make comments about the government's desire to continue buying mortgage securities so the rates stay artificially low. 

What Does This Mean To You?
If you are looking at refinancing or purchasing a home before the end of the year, you might want to get it in gear!  All it will take is one negative comment or insinuation, and the bond market could tank, sending mortgage rates higher.

Fannie Mae's chief economist, Doug Duncan, expects the Fed will extend its MBS purchase program, then slowly wind down.  That could mean more time, but once the news starts circulating about an "end" to the gov't buying program, the markets usually respond well in advance to the actual event. 

Best Course Of Action: If you are going to refinance or purchase, now is a great time to lock in a rate to avoid the market swings.  The bond market has come up over 300 basis points since its lows in June,   which has equated to a rate improvement of about .75%.  Now sure seems like the time to take advantage and avoid gambling that things will get even better - especially knowing the above news is looming.